This article is a based on an extract from a panel discussion on outsourcing which took place at the highly successful, inaugural Annual Meeting of The Network Forum in Warsaw. Chaired by industry veteran John Gubert, the panel comprised Alan Cameron, Global Solutions Sponsor for BNP Paribas Securities Services, Clive Triance, Managing Director and Global Head of Banks and Broker Dealer Sector for HSBC Securities Services and Alex Krunic, Head of Relationship Management – Global Broker Dealer Services for Societe Generale Securities Services.

The Network Forum is a curated global community for the custody, settlement and post-trade industry, aiming to provide a structured learning and networking environment for this tight-knit community. As well as an Annual Meeting held each June, there are Americas, Asia and Africa Meetings, held respectively in the first, second and final weeks of November.

Gubert: If we look at our three core constituencies – broker/dealers, global custodians and investment managers – where are the logical outsourcing boundaries?

Triance: Outsourcing has many different facets. We've noticed very clearly, in the last two years, a drive by brokers to start to look at outsourcing of third-party clearing – freeing them from putting up margin at the exchange, reducing operational risk and reducing their capital requirements. We're also seeing the asset holders, the global custodians, looking closely at account operating – that's mainly because they want to get closer to the assets and have the ability to show their clients that they have control over the assets serviced by someone else. In the investment management space, frankly I would say they've been leaner, more agile in the game and have done more outsourcing with technology providers than perhaps the other two sectors have in the past.

Cameron: I would agree with what Clive's saying: the asset managers clearly led the way in this space, while we've seen the brokers do a great deal of outsourcing in the last ten years. An interesting question is why it has not happened at the corporate and investment banks (CIBs) and, to a lesser extent, at the global custodians. I think that's largely because there haven't been many options available and that's really because the CIBs are just so much more complicated than the other two constituencies. They trade so many more instruments – equities, bonds, derivatives, OTC derivatives, almost everything – and they also have different business forms – agency, their own proprietary business, securities lending and borrowing, repo, treasury activities – so while there has been demand for outsourcing by CIBs there have not really been suppliers able to do this. I think what we're seeing now, with the advances in some of the technology platforms available, is that this is now something that is credible.

Gubert: Can I just pick that up. Is bank-to-bank outsourcing credible?

Krunic: I don't see a problem with a bank outsourcing to another bank, as long as the other bank doesn't have the same core competencies. They have to look at where they add value to their clients and if it's a service that's non-core and that another bank provides, I don't see why not. Just to go back to a couple of points that Clive picked up, when talking about asset managers, we're already on the fourth-generation outsourcing deals and let's not forget that 17, 18 years ago, some things didn't go so well. The initial deals were difficult and many of them cost many banks a lot of money, in terms of taking clients away from their platforms but, as they took on more outsourcing clients, repeating the process two or three times, they obviously got better at it.

Gubert: For the three constituencies, there's a growing ability to use innovative structures such as robotics and artificial intelligence to execute many of the core business functions traditionally outsourced, so shouldn't there be a swing back so that people can actually insource some of the activities previously outsourced quite simply because you no longer need that third-party's scale to do it efficiently?

Cameron: I don't think outsourcing per se is something of the last millennium. I think the trend is ascending. I don't think the changes in technology make it less likely. If anything, I think they make it more likely. Any of these changes in technology requires huge investments and the associated time-frames are only shortening, so again I think that leads to more outsourcing. The key thing, I think, is how are the banks going to be able do this? I think what we'll see is many forming partnerships with technology firms – genuine ones, such as ours with Calypso – which provide the speed-to-market that's required and that also give an assurance of future-proofing for clients. So I think changes in technology by themselves are not something that will stop outsourcing and I think the banks that are fast on their feet can react to this and can use this as an advantage.

Gubert: Prompted by one of the questions from the audience, I struggle to work out what is the role of the banks in the future. I can't work out if the relationship should be a fintech company with a bank in a subservient role, or a bank partnering with a fintech company in the support role. Where do you think the balance lies, and why?

Triance: There is a difference. If you look at the life-cycle of a transaction from the point of view of straight sub-custody and you contrast this with what you can do in terms of value-added services, those extra things require a great deal of capital and cash – the intraday liquidity lines are enormous. A customer can look to an outsourcing technology provider to deliver a solution. If you want to reduce your capital requirements – not just your operational risk capital but your use of capital – you probably need a bank to do that. That's the other aspect of outsourcing.

Gubert: Just to pick this up, it isn't actually that difficult to become a bank. Whether you can become a bank with adequate capital is another issue and I presume you're saying that for a bank to have a role it needs to be a sizeable bank?

Krunic: I can't see a utility providing an end-to-end service to support capital market activities, trading, provision of liquidity and term lending. I mean you're never going to get it from a utility unless they have a huge balance sheet as well as provideing that type of service. So what we're saying here is, there are utilities and probably more will emerge, where they will provide elements of the service, and that's why organizations such as ourselves have gone into partnership. We know what our core competencies are on the banking side and we've outsourced the books and records – and effectively the technology – to Accenture, who connect to our global network. The result of this is that we don't have to write the next cheque when we upgrade our technology. However, these partnerships are not easy to come by, because two things you'll need from your partner are a long-term commitment and you'll absolutely need them to have deep pockets; not only to invest initially but to continually invest in upgrading their technology, to make sure they're keeping up with the regulatory and market changes as they're coming down the stream.

Gubert: It seems that all providers should outsource to some degree. But circumstances and scale will dictate different types of outsourcing. Alex, I think you touched on it, you mentioned the word utility. I struggle to think what is the future role of utilities and where exactly is the boundary between utility and your organizations? So what is the role of the utility and could the utility undertake many of the functions that you currently perform?

Krunic: That's a tough one, John. There's definitely a role for a utility. I think we as an industry should look at collectively outsourcing to a utility, certain functions, such as KYC [Know Your Client]. We all service pretty much the same client base, we all do multiple KYC checks. If we could do that centrally, that would save a lot of banks a lot of money. The same for reconciliations, compliance, risk metrics, data analysis – a lot of these things could be outsourced to a utility. Do I think that you can outsource everything to a utility? No, that's why we're all here, we are different banks providing different services to clients and adding value.

Cameron: For as long as I have been working in this industry, there has been this expectation that the banks would somehow get together and form a commonly owned utility. If you're waiting for this, I think you'll be waiting for a long time, what with so many heads to put together.

Krunic: But one thing that's changed is really the perception of outsourcing. Choice of providers is one thing. If there is choice, more people will consider making this step change. If you were talking to a major bank or a major broker-dealer 15 or 20 years ago, about them outsourcing their entire operation, it wouldn't have been a good conversation. Now, many of those large institutions are thinking, well, why shouldn't we? Because we're running legacy systems which cost us hundreds of millions to operate. If someone would perform that operational piece for us, or that technology piece, we'd consider outsourcing.

Triance: May I draw a distinction: that everyone wants to outsource when times are hard, you're trying to make money in this industry; when times are good, people forget about outsourcing. So I don't know how cyclically it's going to work. Certainly there was a point, after the global financial crisis, that everyone was stuck in a void and had to find a way of saving money. When times are tough, it's easy to sell the idea of saving money. When times are good the focus turns to going into new markets.

Krunic: Just to pick up on one point, what's important about any kind of outsourcing function is to make sure that you can price it correctly to your end-client who pays for the service. Because if clients are not paying for the service, the service provider will not have the ability to keep on investing to be in the business on a long-term basis.

Cameron: I would say that outsourcing is not something that we've just been doing for clients that are looking at shrinking their costs. We've also been doing it, over the years, for brokers that want to expand, going into new countries and new businesses quickly. So, it cuts both ways.

Gubert: Can you each just identify for me one key innovative trend that you are looking at and advise what material impact it will have on the way you'll do business?

Cameron: We've talked at this conference about the most important innovation: the importance of relationships and the growing willingness to partner with fintech firms which will do some things better than us. That is a clear difference. It was not the case and not something we were talking about five years ago. I think that change in attitudes and willingness to work with fintechs is key.

Triance: I want to add two things that we'll see change in the next five years. One is massive reduction in duplication of process, either through a provider's own efforts or through using common platforms. And the other one, I think which will be huge and will be quick – we as a bank are already testing it – is this whole natural-voice technology around bots which is coming to the retail space. That has the capacity to massively drive down the costs which we pass on to the end investor.

Krunic: I think artificial intelligence robotics is really going to drive wholesale change. The manual labour-intensive processes will be the early focus. If you've got 50 people in your reconciliations department, in terms of crunching that data and how we transmit the data to our clients in a more efficient, quicker way – extracting from the huge amount of data precisely the components that are useful to us and to our clients and deliver it in a fast way so it can be used to do business better.

Gubert: What is the one piece of advice you'd give to someone considering outsourcing?

Triance: The one thing I would say to anyone thinking about outsourcing is to understand, across each process outsourced, how long you hold the ball for, when you pass the ball off and when you get it back. Because actually understanding who owns which parts of the life-cycle, and being very clear and contractually tight, means that nobody forgets any part of the transactional life-cycle and who is responsible.

Cameron: I would say, on both sides, find somebody you trust. And trust is a combination of capabilities and attitude. Think very carefully about who you partner with.

Krunic: Find someone who's going to be in the business long-term because, with many outsourcing cases, there's no going back.

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This article is a based on an extract from a panel discussion on outsourcing which took place at the highly successful, inaugural Annual Meeting of The Network Forum in Warsaw. Chaired by industry veteran John Gubert, the panel comprised Alan Cameron, Global Solutions Sponsor for BNP Paribas Securities Services, Clive Triance, Managing Director and Global Head of Banks and Broker Dealer Sector for HSBC Securities Services and Alex Krunic, Head of Relationship Management – Global Broker Dealer Services for Societe Generale Securities Services.

The Network Forum is a curated global community for the custody, settlement and post-trade industry, aiming to provide a structured learning and networking environment for this tight-knit community. As well as an Annual Meeting held each June, there are Americas, Asia and Africa Meetings, held respectively in the first, second and final weeks of November.

Gubert: If we look at our three core constituencies – broker/dealers, global custodians and investment managers – where are the logical outsourcing boundaries?

Triance: Outsourcing has many different facets. We've noticed very clearly, in the last two years, a drive by brokers to start to look at outsourcing of third-party clearing – freeing them from putting up margin at the exchange, reducing operational risk and reducing their capital requirements. We're also seeing the asset holders, the global custodians, looking closely at account operating – that's mainly because they want to get closer to the assets and have the ability to show their clients that they have control over the assets serviced by someone else. In the investment management space, frankly I would say they've been leaner, more agile in the game and have done more outsourcing with technology providers than perhaps the other two sectors have in the past.

Cameron: I would agree with what Clive's saying: the asset managers clearly led the way in this space, while we've seen the brokers do a great deal of outsourcing in the last ten years. An interesting question is why it has not happened at the corporate and investment banks (CIBs) and, to a lesser extent, at the global custodians. I think that's largely because there haven't been many options available and that's really because the CIBs are just so much more complicated than the other two constituencies. They trade so many more instruments – equities, bonds, derivatives, OTC derivatives, almost everything – and they also have different business forms – agency, their own proprietary business, securities lending and borrowing, repo, treasury activities – so while there has been demand for outsourcing by CIBs there have not really been suppliers able to do this. I think what we're seeing now, with the advances in some of the technology platforms available, is that this is now something that is credible.

Gubert: Can I just pick that up. Is bank-to-bank outsourcing credible?

Krunic: I don't see a problem with a bank outsourcing to another bank, as long as the other bank doesn't have the same core competencies. They have to look at where they add value to their clients and if it's a service that's non-core and that another bank provides, I don't see why not. Just to go back to a couple of points that Clive picked up, when talking about asset managers, we're already on the fourth-generation outsourcing deals and let's not forget that 17, 18 years ago, some things didn't go so well. The initial deals were difficult and many of them cost many banks a lot of money, in terms of taking clients away from their platforms but, as they took on more outsourcing clients, repeating the process two or three times, they obviously got better at it.

Gubert: For the three constituencies, there's a growing ability to use innovative structures such as robotics and artificial intelligence to execute many of the core business functions traditionally outsourced, so shouldn't there be a swing back so that people can actually insource some of the activities previously outsourced quite simply because you no longer need that third-party's scale to do it efficiently?

Cameron: I don't think outsourcing per se is something of the last millennium. I think the trend is ascending. I don't think the changes in technology make it less likely. If anything, I think they make it more likely. Any of these changes in technology requires huge investments and the associated time-frames are only shortening, so again I think that leads to more outsourcing. The key thing, I think, is how are the banks going to be able do this? I think what we'll see is many forming partnerships with technology firms – genuine ones, such as ours with Calypso – which provide the speed-to-market that's required and that also give an assurance of future-proofing for clients. So I think changes in technology by themselves are not something that will stop outsourcing and I think the banks that are fast on their feet can react to this and can use this as an advantage.

Gubert: Prompted by one of the questions from the audience, I struggle to work out what is the role of the banks in the future. I can't work out if the relationship should be a fintech company with a bank in a subservient role, or a bank partnering with a fintech company in the support role. Where do you think the balance lies, and why?

Triance: There is a difference. If you look at the life-cycle of a transaction from the point of view of straight sub-custody and you contrast this with what you can do in terms of value-added services, those extra things require a great deal of capital and cash – the intraday liquidity lines are enormous. A customer can look to an outsourcing technology provider to deliver a solution. If you want to reduce your capital requirements – not just your operational risk capital but your use of capital – you probably need a bank to do that. That's the other aspect of outsourcing.

Gubert: Just to pick this up, it isn't actually that difficult to become a bank. Whether you can become a bank with adequate capital is another issue and I presume you're saying that for a bank to have a role it needs to be a sizeable bank?

Krunic: I can't see a utility providing an end-to-end service to support capital market activities, trading, provision of liquidity and term lending. I mean you're never going to get it from a utility unless they have a huge balance sheet as well as provideing that type of service. So what we're saying here is, there are utilities and probably more will emerge, where they will provide elements of the service, and that's why organizations such as ourselves have gone into partnership. We know what our core competencies are on the banking side and we've outsourced the books and records – and effectively the technology – to Accenture, who connect to our global network. The result of this is that we don't have to write the next cheque when we upgrade our technology. However, these partnerships are not easy to come by, because two things you'll need from your partner are a long-term commitment and you'll absolutely need them to have deep pockets; not only to invest initially but to continually invest in upgrading their technology, to make sure they're keeping up with the regulatory and market changes as they're coming down the stream.

Gubert: It seems that all providers should outsource to some degree. But circumstances and scale will dictate different types of outsourcing. Alex, I think you touched on it, you mentioned the word utility. I struggle to think what is the future role of utilities and where exactly is the boundary between utility and your organizations? So what is the role of the utility and could the utility undertake many of the functions that you currently perform?

Krunic: That's a tough one, John. There's definitely a role for a utility. I think we as an industry should look at collectively outsourcing to a utility, certain functions, such as KYC [Know Your Client]. We all service pretty much the same client base, we all do multiple KYC checks. If we could do that centrally, that would save a lot of banks a lot of money. The same for reconciliations, compliance, risk metrics, data analysis – a lot of these things could be outsourced to a utility. Do I think that you can outsource everything to a utility? No, that's why we're all here, we are different banks providing different services to clients and adding value.

Cameron: For as long as I have been working in this industry, there has been this expectation that the banks would somehow get together and form a commonly owned utility. If you're waiting for this, I think you'll be waiting for a long time, what with so many heads to put together.

Krunic: But one thing that's changed is really the perception of outsourcing. Choice of providers is one thing. If there is choice, more people will consider making this step change. If you were talking to a major bank or a major broker-dealer 15 or 20 years ago, about them outsourcing their entire operation, it wouldn't have been a good conversation. Now, many of those large institutions are thinking, well, why shouldn't we? Because we're running legacy systems which cost us hundreds of millions to operate. If someone would perform that operational piece for us, or that technology piece, we'd consider outsourcing.

Triance: May I draw a distinction: that everyone wants to outsource when times are hard, you're trying to make money in this industry; when times are good, people forget about outsourcing. So I don't know how cyclically it's going to work. Certainly there was a point, after the global financial crisis, that everyone was stuck in a void and had to find a way of saving money. When times are tough, it's easy to sell the idea of saving money. When times are good the focus turns to going into new markets.

Krunic: Just to pick up on one point, what's important about any kind of outsourcing function is to make sure that you can price it correctly to your end-client who pays for the service. Because if clients are not paying for the service, the service provider will not have the ability to keep on investing to be in the business on a long-term basis.

Cameron: I would say that outsourcing is not something that we've just been doing for clients that are looking at shrinking their costs. We've also been doing it, over the years, for brokers that want to expand, going into new countries and new businesses quickly. So, it cuts both ways.

Gubert: Can you each just identify for me one key innovative trend that you are looking at and advise what material impact it will have on the way you'll do business?

Cameron: We've talked at this conference about the most important innovation: the importance of relationships and the growing willingness to partner with fintech firms which will do some things better than us. That is a clear difference. It was not the case and not something we were talking about five years ago. I think that change in attitudes and willingness to work with fintechs is key.

Triance: I want to add two things that we'll see change in the next five years. One is massive reduction in duplication of process, either through a provider's own efforts or through using common platforms. And the other one, I think which will be huge and will be quick – we as a bank are already testing it – is this whole natural-voice technology around bots which is coming to the retail space. That has the capacity to massively drive down the costs which we pass on to the end investor.

Krunic: I think artificial intelligence robotics is really going to drive wholesale change. The manual labour-intensive processes will be the early focus. If you've got 50 people in your reconciliations department, in terms of crunching that data and how we transmit the data to our clients in a more efficient, quicker way – extracting from the huge amount of data precisely the components that are useful to us and to our clients and deliver it in a fast way so it can be used to do business better.

Gubert: What is the one piece of advice you'd give to someone considering outsourcing?

Triance: The one thing I would say to anyone thinking about outsourcing is to understand, across each process outsourced, how long you hold the ball for, when you pass the ball off and when you get it back. Because actually understanding who owns which parts of the life-cycle, and being very clear and contractually tight, means that nobody forgets any part of the transactional life-cycle and who is responsible.

Cameron: I would say, on both sides, find somebody you trust. And trust is a combination of capabilities and attitude. Think very carefully about who you partner with.

Krunic: Find someone who's going to be in the business long-term because, with many outsourcing cases, there's no going back.